Financial institutions, such as banks, need to provide a high level of service while reducing costs below those of their competitors. One of the most important roles of a financial institution is to provide currency to customers when the customers need the currency, and where they need it. Most banking customers have come to expect that their financial institution will, at all times, have cash sufficient to satisfy reasonable requests for withdrawal. Therefore, it is important that a financial institution have adequate cash inventory on hand to meet any likely demand. It is also important that the financial institution have an appropriate mix of currency.
The need to have adequate cash on hand, however, imposes high costs on financial institutions. For example, transportation costs for moving currency are generally much higher for currency than for other types of goods because of the need for high security, such as armored cars. In addition, financial institutions make much of their profit by carefully handling and managing money, so that currency needlessly sitting in a bank branch directly costs the financial institution money. In addition, tracking and counting of currency is highly labor intensive, so it is particularly important that currency be moved within a financial institution in a most efficient manner. Moreover, unlike with other inventory management situations, where deposits (i.e., returns of merchandise) are rare, financial institutions regularly must handle deposits of currency.
The challenges of managing cash inventory have increased more recently. In particular, more locations are available for the withdrawal of cash, with the introduction of kiosks and ATMs. In addition, each type of location—whether branch, kiosk, or ATM—may have a unique supply and demand pattern for currency. For example, an ATM will generally have a much smaller capacity than will a branch. Also, an ATM may make cash available at all hours, while a traditional branch generally closes at night. In addition, while cash deposits at a branch can generally be used immediately to satisfy withdrawals, cash deposits at an ATM are generally sealed in envelopes and the cash may not be given to other customers until the machine has been emptied and the transaction has been processed.
Despite the importance of careful currency management in financial institutions, many demand management systems for currency have depended on estimates and rules of thumb. For example, often branch managers use their intuition and past experiences to determine the amount of cash that will be needed. Alternatively, cash may be delivered on a set schedule that depends only upon the amount of cash currently on hand and the amount of time until the next delivery of cash. Generally, these methods do not take into account the costs and risks associated with security of the money, both in storage (for example, at a branch or in an ATM) and in transportation.